Compensation Chapter 7 ( TEST 3 )

Labor supply points

- Assumptions change, supply changes.

Shared choice

- Begins with traditional options of lead, meet, or lag - Offers employees choices in the pay mix.

Organization Factors

- Industry and technology - Employer size - People's preferences Organization strategy: - Low wage, no-services strategy - Low wage, high-services strategy - High-wage, high services strategy

Pay with Competition policy

- Match wage costs to Saved by switching to Product competitors - Attract applicants equal to the labor market competitors

The two objectives Pay level and Pay mix decisions

1. Control costs and increase revenues 2. attract and retain employees

Two things when using the Marginal product revenue model

1. Determine the pay level set by market forces 2. Determine the marginal revenue generated by each new hire.

4 basic assumptions of Labor Markets

1. Employers always seek to maximize profits 2. People are homogeneous and therefore interchangeable. 3. Pay rates reflect all costs associated with employment. 4. Markets faced by employers are competitive.

2 key product market factors

1. Product demand- caps maximum pay level. 2. Degree of competition-highly competitive market are less able to raise prices.

Employer of choice

Corresponds to the brand the company projects as an employer

Marginal Productivity

Each additional person has a progressively smaller share of production factors to work with. (office space, number of computers, telephone lines and hours of clerical support) until these factors change, each new hire produces less than the previous time.

Human Capital

General in specific skills required and investment in human capital.Firms will invest in firm specific skills, but not general skills. Workers must pay for investment in general skills

Additional Factors affecting labor supply

Geographic barriers, union requirements, Lack of information about job openings, The degree of risk involved, The degree of unemployment, Non-monetary aspects of the job.

Job competition

Job requirements may be fixed. Workers compete for jobs based on qualifications and not how low of a wage they will accept. Thus wages are sticky downward.

Reservation Wage

Jobseekers won't accept jobs if pay is below a certain wage, no matter how attractive other job aspects are.

Compensating Differentials

Labor Demand Theory; Working with negative characteristics requires higher pay to attract/retain workers

Labor Costs Formula

Labor costs = Pay level x # of employees

Lag Pay level policy

Paying below market rate may not attract employees unless coupled with higher future returns.

The marginal revenue of labor

The additional revenue generated when the firm employs one more person, with everything else held constant.

Pay Level

The average of the array of rates paid by an employer. (base + benefits + bonuses + value stock of holdings) / # of employees.

Marginal Revenue

The money generated by the sale of the marginal product. Employers seek to max profits, so the employers will hire until the marginal revenue = the cost associated with the most recent hire

External Competitiveness

The pay relationships among organizations - the organization's pay relative to its competitors.

Pay Mix

The various types of payments, or pay forms, that make up total compensation.

Compensating differentials

explains the presence of various pay rates in the market If a job has negative characteristics, then employers must offer higher wages.

Lead Pay level policy

maximizes the ability To attract and retain quality employees.

The marginal product of labor

the additional output associated with the employment of one additional person, with everything else held constant.

Labor Market factors:

1. The quoted price- Stores that label each items price or ads that list job opening's starting wage. 2. The bourse- Stores that allow haggling until an agreement is made, E-bay is an example.

Efficiency wage

An organizations ability to pay means firms with greater profits than competitors can share the success with employees.

Efficiency Wage

Labor Demand Theory; above market wage/pay level will improve efficiency by attracting higher ability workers and discouraging shirking due to risk of losing high wage job. A high wage policy may substitute for intense monitoring.

Sorting and Signalling

Labor Demand Theory; pay policies signal to applicants the attributes that fit the organization. Applicants may signal their attributes by investments they have made in themselves.

What shapes external competitiveness?

Labor Markets, modifications to supply and demand, product market factors and organization factors.

As pay level increases...

Labor costs decrease